Russia presses pause in Ukraine gas dispute

Russia has agreed not to reduce supplies of gas to Ukraine over in the coming days in a time-out intended to allow the countries’ major energy companies to consider proposals put forward by the European Commission to unravel a dispute over gas prices and debt.

Günther Oettinger, the European commissioner for energy, said that Ukraine has also promised to hold back on a threat to refer its dispute over the price that Russia charges to an international arbitrator.

Ukraine is the principal route for Russian gas intended for European consumers.

Yesterday’s meeting, which ended two hours later than expected, involved Ukraine’s energy minister, Yuriy Prodan, and his Russian counterpart, Aleksandr Novak, and also the chief executives of the Russian energy giant Gazprom and of Naftohaz, the Ukrainian gas distributor. Gazprom’s Aleksei Miller and Naftohaz’s Andriy Kobolev met separately for some hours to discuss issues that Oettinger described as “commercial”.

The dispute over payment arrears is, however, complicated by Russia’s demand for pre-payment for future supplies and by a long-standing dispute over the price that Ukraine pays for Russian gas under a contract signed in 2009.

Russia, which has confirmed receipt of the $786m, said before Yesterday’s meeting that Ukraine must repay its debt in full before 9 June, or else it would immediately introduce a requirement that Ukraine pay for gas in advance.

Russia had previously said that it would cut gas from 1 June unless Ukraine started paying in advance.

Yesterday, Russia agreed not to make any demands for pre-payment or to reduce supplies while both sides hold internal consultations. Oettinger said that no date had been set for the next meeting, saying that it might be held at the end of this week, but possibly also at the end of next week.

The European commissioner said that the aim is to settle the outstanding debt and to reach an agreement that would last until mid-2015. That agreement would follow the “normal commercial pattern”, in which gas is supplied and payment is then made.

Oettinger said that Ukraine’s payment of $786m cleared Ukraine’s debt for the first quarter of this year. What remains unresolved are invoices for November and December, and for April and May.

In the first quarter of this year, Russia charged Ukraine $268 per thousand cubic metres of gas consumed. In the months whose bills remain disputed, Russia charged Ukraine a price of $485, 80% more.

The change in prices closely reflects the political turmoil in Ukraine and springs from a contract that Ukraine signed with Russia in 2009, while Yulia Tymoshenko was prime minister. In that contract, Ukraine agreed to a price of $485.

Since then, Ukrainian leaders – including Viktor Yanukovych, the president until February – have argued that the price, which is much higher than paid by Gazprom’s western European customers, should be reduced.

Ukraine believes that the long-term price for gas should be around $268 per thousand cubic metres – a price that Russia gave Yanukovych in December, shortly after he decided not to sign a political and trade agreement with the European Union. After Yanukovych fled Kiev and settled in Russia, Russia returned the price to the level set in the 2009 contract.

In April, after Russia had annexed Ukraine’s Crimean peninsula and with pro-Russian separatists in control of a string of eastern Ukrainian towns and cities, Russia told Ukraine that it must pay for supplies in advance.

In response, Ukraine threatened to refer the price dispute to an international arbitrator in Stockholm. That would, however, significantly delay a resolution of the crisis.

Ukraine has also said that it is preparing a suit against Russia over its annexation of Crimea. In the process of annexation, Russia seized Ukrainian-owned gas companies and gas in Crimea’s storage facilities. One Ukrainian official estimated the amount of gas seized at 2.2 billion cubic metres. The loss of Crimea also deprives Ukraine of untapped gas fields onshore and offshore, as well as the principal site of its emerging renewable-energy industry.